All Forum Posts by: Stuart Udis

Not sure whether you ultimately invested here and know nothing about Simm Capital but based on what you shared the first question you should be asking Simm Capital is where do the 10% dividends derive from? It's also important to understand the amount of committed capital relative to assets under management (basis, not appraised value). I am often retained to vet syndications on behalf of LP's and a common red flag I come across are syndications where the distributions are merely a return of over raised capital. As an LP you fair far better when any funds distributed are the consequence of real estate activity. Perhaps it lacks the "guaranteed" pitch that might intrigue you, but those pre-determined dividends are great until they stop, and usually that's what happens when new capital is not brought into the deal.  Secondly, who cares what the ownership splits are if the gain can't be realized because the values are propped up/can't meet projections, the sponsor cannot execute on the business plan or the fee structure severely eats into the distributable cash when the realization event actually occurs. Also critical in the analysis is the leverage that's used.  Focus on sponsor track record, understand the fees the sponsor charges and when they are collected and how the the sponsor uses bank leverage. Two sponsors can structure their syndications with identical assets and execute the same way meaning the underlying real estate will perform the same but sponsor A uses 50% bank leverage and invests no capital into the deal whereas sponsor B uses 75% bank leverage and invests 10% of the committed capital. Sponsor B may only offer 40% compared to the Sponsor A 65%, but the LP's in Sponsor B's syndication will fair better because far less capital is required. The same can be true if the fee structures are more advantageous to Sponsor A vs. Sponsor B.  This is what many get tripped up on when they review syndications and I suspect many would make different investment decisions if they didn't focus so narrowly on dividends and ownership interest. 

@Rami Khaldi Great post. I really hope other new investors take the time to read what you shared. It is honestly the playbook for the realities of real estate investing vs. what most expect based on what they read or are taught. You correctly pointed out real estate investing requires liquidity/cash reserves. I beleive a number of the other frustrations you experienced could have been mitigagted if more time was spent up front fine tuning whatever contract your GC provided you. Rarely covered in the version that's turned over, but important edits will set expectations, payment schedules, and includes specs/allowances. As you complete more renovations your list of items to inspect will continue to grow, and that's ok. However the roof is something that should always be inspected regardless of any representations that may have been made before the property was purchased.  One item that stands out is the fact you only visited the job site 3-4 times during the course of the 5 months the property was under construction. You should make a conscientious effort to be more visible at your job sites. Based on what you shared and how you approached your first rehab, you should consider this a success. Most fair much worse as there are a number of other issues that often arise that you seemed to have avoided. Even worse, most fail to take inventory of the pitfalls wheras you have a clear understanding of how to better approach your next project. 

I am merely focused on the fact there are people out there teaching you (and others) that you can become a syndicator merely by finding a good deal. I expanded upon that with my own observations on how the same individuals who are teaching this are also teaching other bad business tactics and the reprecussions that will come from the way so many are being taught. The point I was hoping to get across is the lack of consideration that's placed on what happens when money is raised and property is purchased. Just because you can find a property and raise capital does not mean you should take that next step and actually purchase the real estate.

Keep in mind, if you are talking about raising millions of dollars, you are no longer reliant on friends and family money. If this hypothetical person you desrcibe possesses the operational skills and the investment opportunity is good,  there are plenty of equity placement services out there who will find the needed equity check. There are plenty of sponsors who operate in that space who will be the first to  acknowledge  they are not good capital raisers or maybe they merely want to focus their attention on other areas of  the business and rely on service providers such as the one I am describing.  

The same ndividuals who are teaching you and others to find a deal and the money will come are not teaching you to find a sophisticated check writer. They are instead teaching you to find a bunch of less sophisticated capital sources because the sophisticated equity will see through the charade. This is what I find most troubling and what more should be weary of who decide to invest in syndications. Unfortunately its getting harder and harder for anyone intersted in investing as an LP to vet the the sponsor groups as the tactics used to raise capital along with reprenstations made are increasingly falling in the grey area. I attribute much of this to the way so many are being taught. 

@Jordan Northrup This is the wrong mentality when it comes to raising money.  Based on the train of thought you shared you are completely ignoring a critical piece of the equation which is your own capabilties and whether you have the ability to execute on the opportunity. While I don't know your personal capabilities or background, the objective should not be to merely purchase real estate, it should be to execute on an opportunity where you do right by your capital providers. 

I suspect the sources you are referring to are the same who educate others on associating with more established sponsors to give the perception that more of a track and experience exists. As bad as some syndications are currently performing it will only get worse if those without the expertise are armed with the liquidity to make purchases and that's what's happening. So much focus is placed on capital raising and sourcing opportunities but good sponsors are experienced operators. All of a sudden this is no longer necessary with the way so many are being taught. 

A great way to find lenders who are active in your market is to monitor the loans that are originated on the types of properties you personally target. A local public records search will provide you with the recorded mortgages. You should be able to assemble a list of local lenders who are actively lending this way. 

@Andrew Brink This is the wrong approach to take when preparing any type of operating/partnership agreement. Truthfully anyone who turns over a template agreement is doing you a disservice. The parties experience, strengths and availability are critical to ensuring  the partners duties and responsibilities are compatible and capabilities are sufficient to execute on the business. Secondly, the language of the agrement is going to be highly dependent on the project type or investment strategy. Best to seek counsel from your attorney and tax professional but if you are going to insist on saving a few dollars, best to provide more specifics on the type of partnership you are contemplating so you can get your hands on something that's remotely relevant. 

@Art Giacosa What you are proposing is a more complexed entity structure than my past employer who owned a hotel portfolio valued over $1 Billion dollars. As an attorney you already have the upper hand as you should value contracts, the importance of insurance and understand the mechanisms of litigation. Applying those principle, focus your energy on doing the preventative things on a day to day basis that reduces the risk of claims from occurring in the first place (siginign vendor agreeements /collecting insurance certificates) and carry appropriate levels of insurance. The plaintiffs attorneys chase the insurnace money, don't do anything to pique their interest into sniffing around any more. That's all you are doing with your contemplated entity structure as they will be more inclined to want to see what's hidden leading to an even more thorough and invasive discovery process. The deed holder should be an LLC, but no need to over complicate the process. An LLC in the state in which the property is located is sufficient. Most trip up by focusing on the elaborate entity structures but then completely ignore the day to day operations. Most are more concerned with what happens when the claim occurrs than preventing the claim in the first place and those who fall under this category don't even understand the true purpose of functions of the entites they create or how these claims play out in court.

@Menalik Archer  What happens if you can't cash out when you refinance? Perhaps the property doesn't appraise as well as you projected or there are unexpected operating expenses or cap ex that's incurred in year 1? What you are contemplating is very risky and I would advise not purchaisng real estate if you are reliant on a credit card. Using credit cards to advance renovation, particularly longer lead time purchsases is fine but as a general rule of thumb if you don't have the cash in your bank account or an already originated real estate loan with drawable funds to pay that card own, you shouldn't rely on credit cards in your real estate business. What do you think happened to those who used your strategy two years ago not expecting rates to increase exponentially to the point where banks wouldn't provide the cash out at time of refinance? You likely don't hear this story because those who were hurt using your contemplated strategy  are smaller investors who aren't news worthy. However its the same fact pattern as the larger developers who relied on pref equity or mezz debt and are now at a point where the clock continues to tick on those funds because they can't recapture on a refinance. Same story, but a different funding source. I would say the credit card scenario could be even more damaging given the circumstances. 

If your plan is to use the card to help advance the material purchasing while waiting for draws, thats a valid reason to use a credit card, but I see too many inexperienced investors get crushed thinking they can use a credit card to cover the improvements or even the downpayment and I urge you to stay clear of this strategy. If you are someone who can only acquire real estate through the use of credit cards, you shouldn't be buying real estate. Its far too much leverage and more times than not, it will get you in trouble. Again, if the use of the card is merely toi help advance the purchasing of longer lead items until the bank draws hit, that's a different story. 

The 1% rule is one of the most flawed underwriting techniques anyone can rely on.  I've posted  this before but hope this helps dissuade you from relying on this technique:

Expenses disproportionately impact lower rent collecting properties. Take for instance an “A” located 1 +1 duplex where units rent for $2,000/m and compare the building to an identically designed “C” located 1+1 duplex in the same market where units rent for $1,200/m. Now assume each unit is occupied by 1 person. Common utilities paid by the landlord will be similar if not the same; standard services (extermination, changing filters, snow removal, fire safety inspections etc.) will cost the same.

Expenses will vary depending on the market. The cost of doing business varies from municipality to municipality. A $200,000 duplex might have identical rents in municipality “A” and municipality “B” but the property tax rates will vary, local regulations will dictate licensing requirements, labor rates will vary & the particular location will dictate insurance premiums since insurance carriers will weigh local replacement costs and whether the municipality is viewed as being a “plaintiff friendly” in arriving at insurance premiums.

Better situated assets will attract better tenants. While you shouldn’t categorize all tenants and it’s the landlords responsibility to properly screen, the tenants who reside in better situated housing and pay higher rents are more financially responsible meaning lower rate of rent loss and will generally take better care of the property which combined will result in less time allocated towards management functions if self-performed or more favorable management fee structures if 3rd party management companies are utilized (which ties back to #1, as well).